Research On Basis Risk Of Hedging In The Wheat Futures Market Of China

Influenced by many economic and social factors,the price of Chinese wheat spot market fluctuates greatly.This fluctuation leads to the instability of the income of wheat producers,affects their enthusiasm to grow grain,and then affects China’s grain security.It has a great impact on the profitability of enterprises in the wheat industry chain;it has a great impact on the whole grain industry and is not conducive to the stable and healthy development of China’s agriculture and national economy.Meanwhile,futures market,with its unique hedging function,can effectively avoid the price risk of the wheat spot market.China’s wheat futures market can still make some progress on hedging.Compared with some developed countries,the scale of wheat futures market is smaller.Most of the wheat producers,machining and trading enterprises are not active enough in hedging in the futures market.One of the important factors is that there are a series of risks such as fundamental risks in hedging transactions,while the majority of SMES and producers lack the ability to manage the fundamental risks in hedging.Therefore,the study on the basis risk of China’s wheat futures market will be of theoretical and practical significance for improving the hedgers’ risk measurement and management ability,promoting the development of wheat and other agricultural products’ hedging and the China’s agriculture as well as the national economy.Firstly,this paper explains the relevant concepts and specific situations of the wheat futures market to clarify its operation status.After that,it expounds the operating mechanism of hedging and the emergence and development of hedging theory,and then discusses the basis risk,its influencing factors and measurement methods,showing the relationship between futures market,hedging and basis risk,laying a theoretical foundation for the following research.Secondly,based on the definition of basis,this paper analyzes the influencing factors of basis risk in China’s wheat futures market from the aspects of macro economy,relevant markets,relevant products’ prices,seasons and the lagging factor of the basis itself,and uses multiple regression for empirical test.This paper find that factors which has significant influence are the lagging factor of the basis itself,the wheat futures contract price of Chicago Board of Trade(CBOT),the wheat holdings of Zhengzhou Commodity Exchange(CZCE),the Shanghai composite index futures contract price and the corn futures contract price of Zhengzhou Commodity Exchange.The dominant role of which is the lagging factor of the basis itself.Thirdly,the ARMA-GARCH model is used to describe the fluctuation characteristics of the basis series of wheat futures in China,and it was found that the basis series follows a first-order autoregressive process,which supported the empirical results of the influencing factors of the basis series.There is conditional heteroscedasticity in the basis series,and the impact of the condition variance is lasting.The VaR of wheat futures was measured by the parameter method based on the ARMA-GARCH model.At last,from the perspective of hedgers,this paper proposes strategies to manage our country’s wheat futures basis risk.It believes that measures such as selecting the optimal hedging ratio and reasonably using pricing can be adopted to avoid the basis risk of wheat futures.In addition,the linkage between the spot price and futures price of wheat should be enhanced to reduce the volatility of the basis.Those strategies can be used to stabilize the income of agricultural producers and promote the development of China’s agriculture as well as the whole economy.